The International Sustainability Standards Board (ISSB) published the final version of its Sustainability Disclosure Standard on 26 June 2023.
Moves towards the application of the ISSB standards are already underway in many countries, including the start of disclosure under interoperable standards with the ISSB standards in Europe, and in Japan, disclosure of sustainability information in securities reports has started in the financial year ending 31 March 2023.
In response to the demand for the development of specific sustainability disclosure standards, the Sustainability Standards Board of Japan (SSBJ) published three exposure drafts (the "Exposure Drafts") on 29 March 2024, prior to the publication of the finalised standards at the end of March 2025. The following three exposure drafts ("Exposure Drafts") were published. The following three exposure drafts ('the Exposure Drafts') were published.
(i) Exposure Draft Universal Standard for Sustainability Disclosure, 'Application of the Draft Sustainability Disclosure Standard' (the 'Applicable Standard').
(ii) Sustainability Disclosure Thematic Standard Exposure Draft 1: General Disclosure Standard (Draft).
(iii) Sustainability Disclosure Thematic Standard Exposure Draft No. 2: Draft Climate-related Disclosure Standard.
(2) and (3) together are hereinafter referred to as the 'SSBJ Standards'.
This exposure draft has been developed in accordance with the IFRS Sustainability Disclosure Standard, which is considered a global baseline, and also refers to Scope 3 greenhouse gas emissions, which is an important factor in terms of visibility of greenhouse gas emissions for decarbonisation.
This paper describes developments in Japan following the publication of the final version of the ISSB and the status of deliberations in the SSBJ, with a focus on Scope 3.
1. background to the publication of the draft SSBJ
The Sustainability Standards Board Japan (SSBJ) was established in July 2022 as an internal organisation of the Financial Accounting Standards Foundation (FASF) with the aim of developing Japanese domestic standards for sustainability disclosure and disseminating opinions to the ISSB (Figure 1).
Figure 1: Correspondence between the IFRS Foundation and the FASF(in...)Sustainability Standards Board (SSBJ))
The SSBJ has the nature of a domestic counterpart to the ISSB, and the SSBJ standards published here are interpretations of the international standards produced by the ISSB for the Japanese market.
This SSBJ Standard has been developed following an individual issue-by-issue review of whether the content of the IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2) published in June 2023 should also be incorporated into the SSBJ Standard.
IFRS S1 consists of two parts: one part that sets out the fundamentals for preparing sustainability-related financial disclosures and the other part that sets out the matters to be disclosed in relation to sustainability-related risks and opportunities ('core content'). The core content is comprised of two parts.
This Exposure Draft sets out the basic requirements for a standard that corresponds to IFRS S1 in Japan.(i) "Applicable standards."With,
Define core content consisting of Governance, Strategy, Risk Management and Indicators and Targets.(ii) "General standards."and proposes to present them separately, which simplifies the structure compared to the IFRS standard.
Figure 2: Structural differences between ISSB and SSBJ standards
(Source: Sustainability Standards Board, "Sustainability Disclosure Thematic Standard Exposure Draft No. 2, Draft Climate-related Disclosure Standard.'
*IFRS S1: provides a set of disclosure requirements designed to enable companies to communicate with investors about the sustainability-related risks and opportunities they face over the short, medium and long term.
IFRS S2: Sets out specific climate-related disclosures and is to be used in conjunction with IFRS S1.
Based on the desire at the Financial Services Board's General Meeting on 19 February 2024 to apply the SSBJ standards to 'companies that focus on constructive dialogue with global investors', it is envisaged that the SSBJ standards will in principle apply to prime listed companies.
With the publication of the previously unclear framework for measuring and disclosing Scope 3 greenhouse gas emissions in an exposure draft, it is expected that efforts to disclose these emissions will become increasingly important in corporate governance in the future.
The next section summarises the deliberations to date, focusing on Scope 3.
2. overview of Scope 3
Visualisation of greenhouse gas emissions is increasingly required to achieve carbon neutrality, and an important indicator for this is Scope 3 greenhouse gas emissions.
Scope 1 represents direct greenhouse gas emissions by the reporting company itself, while Scope 2 represents indirect emissions from the use of electricity, heat and steam supplied by other companies.
In contrast, Scope 3 refers to indirect greenhouse gas emissions occurring in the value chain of the reporting company that are not specifically included in Scope 2, and includes both upstream and downstream greenhouse gas emissions.
It also states that it is permissible not to disclose Scope 3 emissions in the first year of reporting as a transitional measure, but with the proposed application of the SSBJ standard starting from the March 2027 or March 2028 reporting period for prime listed companies, Scope 3 disclosure requirements in the Japanese market requirements is becoming an immediate issue.
Scope 3 greenhouse gas emissions are divided into the following 15 categories as set out in the Corporate Value Chain (Scope 3) Standard for Greenhouse Gas Protocols (2011), eight of which relate upstream and seven downstream of the company.
For example, Scope 3 category 'Category 15' is 'Investment', which in this case would classify greenhouse gas emissions by third parties financed by the reporting company.
Table 1: 15 categories defined by the Corporate Value Chain (Scope 3) Criteria (2011) of the Greenhouse Gas Protocol(Source:GHG Protocol Scope 3 criteria.(Prepared by the author from)
| (i) | Purchased goods and services | nine | Downstream transport and distribution |
| (ii) | capital goods | 10 (used in legal documents) | Processing of products sold. |
| (iii) | Fuel and energy-related activities not included in Scope 1 greenhouse gas emissions or Scope 2 greenhouse gas emissions. | eleventh sign of the Chinese calendar | Use of products sold. |
| (iv) | Upstream transport and distribution | ⑫ | Disposal of products sold. |
| (v) | Waste generated in operations. | ⑬ | Downstream leased assets |
| 6) | business trip | ⑭ | franchise |
| seven (used in legal documents) | Commuting of employees | 15 (used in legal documents) | investment |
| viii) | Upstream leased assets |
*The term 'greenhouse gases' in the SSBJ standards refers to the seven greenhouse gases listed in the Kyoto Protocol: carbon dioxide (CO₂), methane (CH₄), dinitrogen monoxide (N₂O), hydrofluorocarbons (HFCs) nitrogen trifluoride (NF₃), perfluorocarbons (PFCs ) and sulphur hexafluoride (SF₆).
In the SSBJ Standard, as in the IFRS Sustainability Disclosure Standard, Scope 3 greenhouse gas emissions are measured in accordance with the Corporate Accounting and Reporting Standard for Greenhouse Gas Protocols (2004) and in accordance with the above 15 categories,Must be broken down and disclosed by category relevant to the activities of the reporting entityIt stipulates that.
On the other hand, the practice of measuring Scope 3 greenhouse gas emissions is less cumulative and developing, and not all categories apply to companies, as the categories included in Scope 3 greenhouse gas emissions vary depending on the facts and circumstances of the company.
Therefore, while companies are required to consider the relevance of all 15 categories,It may be decided that all categories do not need to be included in the measurement of Scope 3 greenhouse gas emissions。
The exposure draft also requires disclosure of the absolute total amount of greenhouse gas emissions generated during the reporting period, broken down into Scope 1, Scope 2 and Scope 3, and that theseTotal absolute gross valueThe law states that the following must be disclosed.
Disclosure of totals is not required by IFRS S2,SSBJ's own standards.
Figure 3: Overview of the scope of the GHG Protocol and emissions across the value chain
(Source:Ministry of the Environment public documents)
3. status of deliberations on Scope 3
2 October 2023.SSBJ public documentsAccording to the Scope 3 Greenhouse Gas Emissions Measurement Discussion, there are two types of discussion on the measurement of Scope 3 greenhouse gas emissions: one on the measurement common to all three scopes and one specific to Scope 3 greenhouse gas emissions.
The former includes 'reassessing the scope of climate-related risks and opportunities through the value chain', 'using information from different reporting periods' and 'aggregating greenhouse gases converted into CO₂ equivalents', while the latter includes 'applying the scope of materiality in disclosing absolute gross quantities', 'Scope 3 measurement framework' and ' emissions related to finance (financed emissions)".
Below is a summary of the main points in each of the discussions. Please note that the following discussion is based on Exposure Draft No. 2 and the Applicable Standards.
◆Three common scopes of discussion
[Reassessing the scope of climate-related risks and opportunities through the value chain].
'Value chain' is defined as 'all interactions, resources and relationships that relate to the business model of the reporting entity and the external environment in which it operates'.
The Exposure Draft requires that the scope of the value chain must be determined using reasonable and supportable information and that all affected climate-related risks and opportunities are reviewed throughout the value chain in the event of a significant event or a material change in circumstances.
In measuring Scope 3 greenhouse gas emissions, it is also necessary to review which of the 15 Scope 3 categories and which companies in the value chain should be included.
[Use of information from different reporting periods].
In measuring greenhouse gas emissions, the calculation period of information obtained from each company in the value chain may differ from the reporting period of the reporting company, which may make it difficult to use the information to disclose the greenhouse gas emissions of the reporting company.
In such cases,
(⑴Use the most recent data for each company in the value chain that is available without excessive cost or effort
(⑵The length of the calculation period for the information obtained from each company in the value chain is the same as the length of the reporting period of the reporting entity.
(iii) Disclose the effect, if any, of significant events or material changes in circumstances relating to the greenhouse gas emissions of the reporting entity that occurred between the end of the calculation period for the information obtained from each entity in the value chain and the end of the reporting period in the general purpose financial report of the reporting entity.
When all of the above requirements (1)~(3) are met, this exposure draft provides that the greenhouse gas emissions of a reporting entity may be measured using information from a different calculation period than the reporting entity's reporting period.
[Aggregation of greenhouse gases converted into CO₂ equivalents].
In the context of companies' disclosures on greenhouse gas emissions,above-mentionedThe seven types of greenhouse gas emissions that have been estimated are required to be aggregated into CO₂ equivalents. There are two methods for measuring greenhouse gas emissions: 'direct measurement' and 'estimation'.
If direct measurement methods are used, the seven greenhouse gas emissions must be converted into CO₂ equivalents using global warming coefficients for a 100-year time horizon based on the most recent Intergovernmental Panel on Climate Change assessment available at the end of the reporting period.
If by way of an estimate, the most expressive of a company's activities, 'theactivity level', corresponding to the amount of activity concerned.emission factorThe use of the "-" is required. The emission factor is the same as the "emission intensityIt is sometimes referred to as 'the
◆Discussions in Scope 3 greenhouse gas emissions
[Application of materiality determinations in the disclosure of absolute total Scope 3 greenhouse gas emissions.
According to the Applicable Standards, information required by the SSBJ Standards need not be disclosed if it is not material.
Materiality" in this context is defined as "the extent to which, in the context of sustainability-related financial disclosures, the omission, misstatement or obscuring of certain information could reasonably be expected to influence the decisions made by the primary users of a general Defined as 'reasonably likely to influence the decisions made by the primary users of the purpose financial report'.
It is expected that the materiality judgement will be applied to the disclosure of absolute gross amounts in Scope 3, but a quantitative threshold for determining the categories for which absolute gross amounts are measured will not be set, taking into account the lack of accumulated practice, the potential increased burden on some entities, and the balance with other standards, It is proposed in the exposure draft to incorporate the provisions of IFRS S2 in its entirety.
*Definition of 'absolute gross': non-intrinsic, pre-offset greenhouse gas emissions before taking into account any current or future direct and indirect mitigation and adaptation efforts by companies (e.g. carbon credits that they plan to use).
[About the Scope 3 measurement framework].
Under the SSBJ standards, greenhouse gas emissions must be measured in accordance with the Corporate Accounting and Reporting Standard for Greenhouse Gas Protocols (2004), which also applies to Scope 3.
The SSBJ provides guidance for the preparation of Scope 3 greenhouse gas emissions disclosures in Exposure Draft No. 2, based on the Scope 3 Measurement Framework in IFRS S2.
There are two methods for quantifying emissions - 'direct measurement' through monitoring and 'estimation' - but the former is fraught with challenges and the latter is basically included in the calculation.
In the latter, as noted above, "activity level' and '.emission factorThe measurement is based on a combination of two types of data: primary data obtained inside the reporting company's value chain and secondary data obtained externally.
In addition, the calculation of Scope 3 greenhouse gas emissions is,Publicly available documents from the Ministry of the EnvironmentIt can also be found from.
[Disclosure of financed emissions.
Financed emissions are part of Category 15 'Investments' as defined in the Scope 3 Standard (2011), where the reporting entity performs one or more of the following activities: (1) activities related to asset management, (2) activities related to commercial banking, (3) activities related to insurance. Additional information on financed emissions is required to be disclosed if the reporting entity engages in one or more of the following activities.
If the reporting entity engages in such activities but is not regulated by the laws of the jurisdiction in which it operates, it may choose not to disclose additional information on financed emissions, as it is difficult to determine whether additional disclosure is required. In such cases, the company is required to disclose such information.
4. feasibility and challenges of Scope 3 greenhouse gas emissions
So far, we have outlined the conditions and methods for disclosing and measuring Scope 3 greenhouse gas emissions, but the status of Scope 3 disclosure varies widely from company to company.
The chart below shows that companies with a market capitalisation of JPY 1 trillion or more have made progress in disclosing all of the TCFD recommendations (blue box in the table below), while companies with a market capitalisation of less than JPY 300 billion have a disclosure ratio of less than 50% (red box in the table below), with scenario analysis, risk management and Scope 3 disclosure particularly The results show that disclosure of scenario analysis, risk management and Scope 3 is particularly low.
Figure 4: Disclosure of TCFD recommendations by market capitalisation
(Source:Japan Exchange Group, 'Survey of Information Disclosure in line with TCFD Recommendations (FY2022)'.)
Scope 3 requires visualisation and reduction of greenhouse gas emissions throughout the supply chain, and therefore requires the involvement of many companies in the supply chain. As a result, measurement and calculation have become more complex and many companies are struggling to cope.
Currently in Japan, there are few requests for disclosure from listed markets and investors, making it difficult to see the significance of efforts to reduce greenhouse gas emissions.
Another major barrier to disclosure is the lack of know-how and funding to visualise and reduce greenhouse gas emissions.
Further difficulties in measuring and disclosing greenhouse gas emissions in Scope 3 include,Drawing the line of measurement coverage on the value chainWith,Capturing accurate dataThe following are some examples.
[Reassessing the scope of climate-related risks and opportunities through the value chain].As stated in Section 3.1, the Exposure Draft requires reasonable and supportable information in determining the scope of the value chain.
It is not only necessary to specify whether suppliers are limited to domestic or international suppliers, but also to specify the activities covered by each of the 15 categories in Scope 3.
In some cases, a review of all affected climate-related risks and opportunities is required,
In measuring Scope 3 greenhouse gas emissions, further detailed reviews may be required, which can be very labour intensive.
The SSBJ standard is also based on the assumption that reliable estimates of Scope 3 greenhouse gas emissions can be made by using secondary data, industry average data, etc. However, if primary data is not collected and stored, and if industry average data or secondary data from third-party data providers is not also collected and stored, for example, the SSBJ standard does not provide for a reliable estimate of Scope 3 greenhouse gas emissions,Scope 3 Situations where greenhouse gas emissions cannot be measured.are considered to be.
Therefore, while acknowledging this situation and requiring companies to disclose how they manage their Scope 3 greenhouse gas emissions, and if not, to do so, they must also request accurate calculations from other companies in the value chain.
And since there is no quantitative threshold for determining which categories of Scope 3 GHG emissions are to be measured in absolute terms, and the types of categories that apply vary from company to company, it can be very difficult to measure and disclose for all categories.
For these situations, aiESG provides appropriate company evaluation indicators through AI-based analysis.
As a SASB licence holder, aiESG's services can provide reliable support for compliance with the increasingly complex SSBJ standards, which include many elements.
5. conclusion
As decarbonisation on a global scale progresses with the development of the ISSB International Standard, there is a growing focus on future deliberations to finalise the SSBJ standard.
At the same time, the importance of visualising greenhouse gas emissions, including Scope 3, is increasing and disclosure among companies is expected to accelerate.
aiESG provides support on ESG-related standards and frameworks, from basic content to actual disclosure of non-financial information. aiESG is happy to assist companies with ESG compliance.
Enquiry:
https://aiesg.co.jp/contact/
References.
[1]https://www.ssb-j.jp/jp/wp-content/uploads/sites/6/2024ed01_01.pdf
[2]https://www.jpx.co.jp/corporate/sustainability/esgknowledgehub/disclosure-framework/06.html
[3]https://www.ssb-j.jp/jp/wp-content/uploads/sites/6/2024ed01_04.pdf
[4]https://www.fsa.go.jp/singi/singi_kinyu/sustainability_disclose_wg/shiryou/20240326/03.pdf
[5]https://www.ssb-j.jp/jp/wp-content/uploads/sites/6/2024ed01_02.pdf
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